official macro final
While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent," a more precise account of the Fed's action would be as follows:
"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent."
Which of the following shifts aggregate demand to the right?
The Fed buys bonds in the open market.
Which of the following statements concerning the aggregate demand and aggregate supply model is correct?
The price level and quantity of output adjust to bring aggregate demand and supply into balance.
The marginal propensity to consume (MPC) is defined as the fraction of
extra income that a household consumes rather than saves.
In the aggregate demand and aggregate supply model, sticky wages, sticky prices, and misperceptions about relative prices
have temporary effects.
In the short run, open-market purchases
increase investment and real GDP, and decrease nominal interest rates.
The effect of an increase in the price level on the aggregate-demand curve is represented by a
movement to the left along a given aggregate-demand curve
According to the classical model, an increase in the money supply causes
prices to rise in the long run
The classical dichotomy refers to the separation of
real and nominal variables.
The investment component of GDP measures spending on
residential construction, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively large amount.
Tax cuts shift aggregate demand
right as do increases in government spending.
As the price level rises
the exchange rate rises, so net exports fall
If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by
$60 billion, but the effect would be larger if there were an investment accelerator.
Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the
) left by $500 billion.
Which of the following illustrates how the investment accelerator works?
An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels.
Which of the following correctly explains the crowding-out effect?
An increase in government expenditures increases the interest rate and so reduces investment spending.
For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?
An increase in the price level increases the interest rate.
Suppose there are both multiplier and crowding-out effects but without any accelerator effects. An increase in government expenditures would definitely
Any of the above outcomes are possible.
Refer to Figure 33-4. A decrease in taxes would move the economy from C to
B in the short run and A in the long run.
Which of the following shifts aggregate demand to the left?
a decrease in the money supply
Which of the following will reduce the price level and real output in the short run?
a decrease in the money supply
Which of the following would cause investment spending to decrease and aggregate demand to shift left?
a decrease in the money supply and the repeal of an investment tax credit.
According to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply leads to
a decrease in the price level but does not change real GDP.
A decrease in U.S. interest rates leads to
a depreciation of the dollar that leads to greater net exports.
An increase in the interest rate could have been caused by
a rise in the price level causing the money-demand curve to shift rightward.
The classical dichotomy and monetary neutrality are represented graphically by
a vertical long-run aggregate-supply curve.
Which of the following is correct?
a) A higher price level shifts money demand rightward. b) When money demand shifts rightward, the interest rate rises. c) A higher interest rate reduces the quantity of goods and services demanded. d) All of the above are correct
Other things the same, which of the following happens if the price level rises?
a) Money demand shifts rightward. b) Initially there is an excess demand for money in the money market. c) The interest rate rises. d) All of the above are correct.
Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?
a) an increase in government expenditures b) an increase in net exports c) an increase in investment spending d) All of the above are correct.
Which of the following would increase output in the short run?
a) an increase in stock prices makes people feel wealthier b) government spending increases c) firms chose to purchase more investment goods d) All of the above are correct.
Which of the following policy actions shifts the aggregate-demand curve?
a) an increase in the money supply b) an increase in taxes c) an increase in government spending d) All of the above are correct.
When the interest rate is above the equilibrium level
a) the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. b) people respond by buying interestbearing bonds or by depositing money in interest-bearing bank accounts. c) bond issuers and banks respond by lowering the interest rates they offer. d) All of the above are correct.
Critics of stabilization policy argue that
a) there is a lag between the time policy is passed and the time policy has an impact on the economy. b) the impact of policy may last longer than the problem it was designed to offset. c) policy can be a source of, instead of a cure for, economic fluctuations. d) All of the above are correct.
If businesses in general decide that they have overbuilt and so now have too much capital, their response to this would initially shift
aggregate demand left
The initial impact of an increase in an investment tax credit is to shift
aggregate demand right.
Which of the following would cause prices and real GDP to rise in the short run?
aggregate demand shifts right
The price level rises in the short run if
aggregate demand shifts right or aggregate supply shifts left.
Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift
aggregate demand to the right.
Which of the following would raise the price level in both the short and long run?
an increase in government expenditures
Which of the following shifts short-run aggregate supply left?
an increase in price expectations
Which of the following shifts both the shortrun and long-run aggregate supply right?
an increase in the capital stock
Which of the following would cause prices and real GDP to rise in the short run?
an increase in the money supply
Which of the following events would shift money demand to the right?
an increase in the price level
Which of the following shifts the long-run aggregate supply curve to the left?
an increase in the price of imported natural resources and an increase in trade restrictions.
Automatic stabilizers
are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?
as people revise their price-level expectations downward, firms and workers strike bargains for lower nominal wages.
Over the last fifty years both real GDP and prices have trended upward in most countries. Continuing real GDP growth and inflation can be explained by
continued technological progress and continuing increases in the money supply.
the change in aggregate demand that results from fiscal expansion changing the interest rate is called the
crowding-out effect.
Other things the same, if workers and firms expected inflation to be 2%, but it is only 1% then
employment and production fall.
In the long run, an increase in the stock of human capital
makes the price level fall, while increases in the money supply make prices rise
An increase in household saving causes consumption to
fall and aggregate demand to decrease.
An increase in the interest rate causes investment to
fall and the exchange rate to appreciate.
Other things the same, if the price level falls, domestic interest rates
fall, so domestic residents will want to hold more foreign bonds
During recessions employment typically
falls substantially. As the recession ends, employment rises gradually
When the price level increases, the real value of people's money holdings
falls, so they buy less.
In recent years, the Federal Reserve has conducted policy by setting a target for the
federal funds rate.
Keynes believed that economies experiencing high unemployment should adopt policies to
increase aggregate demand.
According to the interest-rate effect, an increase in the price level wil
increase money demand and interest rates. Investment declines.
Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?
increase taxes
To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could
increase the money supply by buying bonds
When the Fed buys government bonds, the reserves of the banking system
increase, so the money supply increases.
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
increased consumption, which shifts the aggregate-demand curve right.
The misperceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has
increased, so they increase production.
When taxes decrease, consumption
increases as shown by a shift of the aggregate demand curve to the right.
If expected inflation is constant, then when the nominal interest rate increases, the real interest rate
increases by the change in the nominal interest rate.
Which of the following explains why production rises in most years?
increases in the labor force increases in the capital stock advances in technological knowledge
The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it
increases income and thereby increases consumer spending.
People will want to hold more money if the price level
increases or if the interest rate decreases.
According to the liquidity preference theory, an increase in the overall price level of 10 percent a) i
increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.
Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?
institute an investment tax credit or increase the money supply
When the money supply increases
interest rates fall and so aggregate demand shifts right.
When households decide to hold more money at any given interest rate,
interest rates rise and investment decreases.
if people decide to hold less money at any given interest rate, then
money demand decreases, there is an excess supply of money, and interest rates fall.
As real GDP falls,
money demand falls, so the interest rate falls
The interest rate falls if
money demand shifts left or money supply shifts right.
Refer to Figure 33-4. If the economy is at A and there is a fall in aggregate demand, in the short run the economy
moves to D.
The effects of a higher than expected price level are shown by
moving to the right along a given aggregate supply curve.
When the dollar appreciates, U.S.
net exports fall, which decreases the aggregate quantity of goods and services demanded.
Which of the following both shift aggregate demand right?
net exports rise for some reason other than a price change and government purchases rise.
When the dollar depreciates, U.S.
net exports rise, which increases the aggregate quantity of goods and services demanded.
According to classical macroeconomic theory, changes in the money supply affect
nominal variables, but not real variables.
The goal of monetary policy and fiscal policy is to
offset shifts in aggregate demand and thereby stabilize the economy.
The aggregate demand and aggregate supply model implies monetary neutrality
only in the long run.
A decrease in the expected price level shift
only the short-run aggregate supply curve right.
Of the following theories, which is consistent with a vertical long-run aggregate supply curve?
oth the sticky-wage and misperceptions theories.
In the short-run an increase in the costs of production makes
output fall and prices rise
If there are floods or droughts or a decrease in the availability of raw materials
output falls in the short run
As the price level falls
people are more willing to lend, so interest rates fall.
When the interest rate is below the equilibrium level,
people respond by selling interestbearing bonds or by withdrawing money from interest-bearing bank accounts
When the price level falls
people want to hold less money. b) the interest rate falls. c) investment spending rises. d) All of the above are correct.
When there is an excess supply of money,
people will try to get rid of money causing interest rates to fall. Investment increases
As the price level rises
people will want to buy fewer bonds, so the interest rate rises.
According to the theory of liquidity preference, money demand
is negatively related to the interest rate, while the money supply is independent of the interest rate.
The interest-rate effect
is the most important reason, in the case of the United States, for the downward slope of the aggregatedemand curve
As the price level falls
people will want to buy more bonds, so the interest rate falls.
The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,
production is more profitable and employment rises.
Which of the following is not included in aggregate demand?
purchases of stock and bond
When households find themselves holding too much money, they respond by
purchasing interest-earning financial assets and interest rates fall.
The aggregate-demand curve shows the
quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level.
Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically as
quantity of output supplied = natural rate of output + a(actual price level - expected price level).
In which of the following cases would the quantity of money demanded be largest?
r = 0.03, P = 1.3
In which of the following cases would the quantity of money demanded be smallest?
r = 0.06, P = 1.0
Other things the same, automatic stabilizers tend to
raise expenditures during recessions and lower expenditures during expansions.
If the government repeals an investment tax credit and increases income taxes,
real GDP and the price level fall.
A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a
liquidity trap.
Microeconomic substitution is impossible for the economy as a whole because
real GDP measures the total quantity of goods and services produced by all firms in all markets.
The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% and people were expecting it to rise by 2%, then firms have
lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied
Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?
both the multiplier effect and the crowding-out effect
Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?
both the nominal interest rate and the real interest rate
Shifts in aggregate demand affect the price level in
both the short and long run.
Changes in the interest rate help explain
both the slope of and shifts of aggregate demand.
If the interest rate is above the Fed's target, the Fed should
buy bonds to increase the money supply.
To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by
buying government bonds, which increases the supply of money.
Over the business cycle investment fluctuates more than
consumption.
The lag problem associated with fiscal policy is due mostly to
the political system of checks and balances that slows down the process of implementing fiscal policy.
The long-run effect of an increase in household consumption is to raise
the price level and leave real output unchanged.
An example of an automatic stabilizer is
unemployment benefits
The aggregate supply curve is
vertical in the long run and slopes upward in the short run.
Most economists believe that in the short run
real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend.
A relatively mild period of falling incomes and rising unemployment is called a(n)
recession.
When we say that economic fluctuations are "irregular and unpredictable," we mean that
recessions do not occur at regular intervals.
Assuming no crowding-out, investmentaccelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand
right by $100 billion
Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the
right by $68 billion.
Stagflation exists when prices
rise and unemployment rises.
According to liquidity preference theory, if the price level increases, then the equilibrium interest rate
rises and the aggregate quantity of goods demanded falls.
An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level
rises, shifting aggregate supply left
If the price level falls, the real value of a dollar
rises, so people will want to buy more
As the price level rises, the interest rate
rises, so the supply of dollars in the market for foreign currency exchange decreases.
In the long run, fiscal policy primarily affects
saving, investment, and growth. In the short run, it affects primarily aggregate demand.
Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could
sell bonds to raise interest rates.
If, at some interest rate, the quantity of money supplied is less than the quantity of money demanded (a shortage), people will desire to
sell interest-bearing assets, causing the interest rate to increase.
When the Federal Reserve increases the Federal Funds target rate, it achieves this target by
selling government bonds. This action will reduce investment and shift aggregate demand to the left.
Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand
shifts rightward by $100 billion.
Liquidity preference theory is most relevant to the
short run and supposes that the interest rate adjusts to bring money supply and money demand into balance
Other things the same, an increase in the expected price level shifts
short-run aggregate supply left
In 1936, John Maynard Keynes published a book, The General Theory of Employment, Interest and Money, which attempted to explain
short-run economic fluctuations
Most economists use the aggregate demand and aggregate supply model primarily to analyze
short-run fluctuations in the economy.
The aggregate demand curve shifts left if either
speculators gain confidence in U.S. assets or foreign countries enter into recession.
An unexpected increase in the price level that temporarily lowers real wages and induces more employment and output in an economy, occurs in
sticky-wage theory.
In order to understand how the economy works in the short run, we need to
study a model in which real and nominal variables interact
Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity preference theory there is an excess
supply of money until the interest rate decreases.
If the Federal Reserve increases the money supply, then initially there is a
surplus in the money market, so people will want to buy bonds.
The long-run aggregate supply curve shifts right if
technology improves
Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is
temporarily low and so supply a smaller quantity of labor.
Monetary policy is determined by
the Federal Reserve and involves changing the money supply
If the multiplier is 3, then the MPC is
2/3.
if the MPC = 4/5, then the government purchases multiplier is
5
Which of the following is not a determinant of the long-run level of real GDP?
the price level.
Shifts in the aggregate-demand curve can cause fluctuations in
the level of output and in the level of prices.
Refer to Figure 33-4. If the economy starts at A, a decrease in the money supply moves the economy
to C in the long run
The logic of the multiplier effect applies
to any change in spending on any component of GDP.
The multiplier for changes in government spending is calculated as
1/(1 - MPC).
During recessions declines in investment account for about
2/3 of the decline in real GDP.
Refer to Figure 33-4. If the economy is in long-run equilibrium, then an adverse shift in aggregate supply would move the economy from
C to D.
Refer to Figure 33-4. The economy would be moving to long-run equilibrium if it started at
D and moved to C.
The theory of liquidity preference assumes that the nominal supply of money is determined by the
Federal Reserve.
According to liquidity preference theory, the slope of the money demand curve is explained as follows:
People will want to hold more money as the cost of holding it falls.
Real GDP is the variable most commonly used to measure
Real GDP is the variable most commonly used to measure short-run economic fluctuations. It is almost impossible to predict these fluctuations with much accuracy
If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then
aggregate demand falls by 11/2 x $40 billion.
If the stock market booms, then
aggregate demand increases, which the Fed could offset by decreasing the money supply.
An increase in the price level and a reduction in output (stagflation) would result from
bad weather in farm states
Wages tend to be sticky
because of contracts, social norms, and notions of fairness.
Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left. If there is no policy response, then eventually
because unemployment is high, wages will be bid down and short-run aggregate supply will shift right.
A tax increase has
both a crowding-out and multiplier effect
Which of the following decreases in response to the interest-rate effect from an increase in the price level?
both investment and consumption
When the actual change in the price level differs from its expected change, which of the following can explain why firms might change their production?
both menu costs and mistaking a price level change for a change in relative prices
Monetary policy
can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is implemented.
Monetary policy can be described either in terms of the money supply or in terms of the interest rate." Thisstatement amounts to the assertion that
changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.
When the price level falls the quantity of
consumption goods demanded and the quantity of net exports demanded both rise.
The idea that expansionary fiscal policy has a positive effect on investment is known as
the investment accelerator
Other things the same, if the long-run aggregate supply curve shifts right, prices
decrease and output increases.
What actions could be taken to stabilize output in response to a large decrease in U.S. net exports?
decrease taxes or increase the money supply
In the short run, an increase in the money supply causes interest rates to
decrease, and aggregate demand to shift right
If taxes
decrease, then consumption increases, and aggregate demand shifts rightward.
Other things the same, if the price level is lower than expected, then some firms believe that the relative price of what they produce has
decreased, so they decrease production
A decrease in government spending
decreases the interest rate and so investment spending increases.
In which case can we be sure real GDP rises in the short run?
foreign economies expand and government purchases rise.
Fiscal policy refers to the idea that aggregate demand is affected by changes in
government spending and taxes.
If households view a tax cut as temporary, then the tax cut
has less of an effect on aggregate demand than if households view it as permanent.
Fiscal policy is determined by
he president and Congress and involves changing government spending and taxation.
Other things the same, if the price level rises by 2% and people were expecting it to rise by 5%, then some firms have
higher than desired prices, which depresses their sales
The long-run aggregate supply curve shifts right if
immigration from abroad increases. b) the capital stock increases. c) technology advances. d) All of the above are correct
Macroeconomic forecasts are
imprecise; this makes policy lags more relevant.
The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change
in the price level, but not output
Keynes explained that recessions and depressions occur because of
inadequate aggregate demand.
Recessions in Canada and Mexico would cause
the U.S. price level and real GDP to fall.
According to the theory of liquidity preference,
the demand for money is represented by a downward-sloping line on a supply-and-demand graph.
Using the liquidity-preference model, when the Federal Reserve decreases the money supply,
the equilibrium interest rate increases.
Which of the following effects helps to explain the slope of the aggregate-demand curve?
the exchange-rate effect b) the wealth effect c) the interest-rate effect d) All of the above are correct.
The lag problem associated with monetary policy is due mostly to
the fact that business firms make investment plans far in advance.
The Employment Act of 1946 states that
the government should promote full employment and production.
If the Fed increases the money supply
the interest rate decreases, which tends to raise stock prices.
When the price level falls
the interest rate falls, so the quantity of goods and services demand rises.
People choose to hold a larger quantity of money if
the interest rate falls, which causes the opportunity cost of holding money to fall.
According to classical macroeconomic theory, changes in the money supply affect
the price level, but not unemployment.
If there are sticky wages, and the price level is greater than what was expected, then
the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the shortrun aggregate supply curve.
As the interest rate falls,
the quantity of money demanded rises, which would reduce a surplus.
We depart from the assumptions of classical economics when we focus on the relationship between
the quantity of output and the price level.
f the actual price level is 165, but people had been expecting it to be 160, then
the quantity of output supplied rises, but only in the short run.
When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded?
the real value of wealth b) the interest rate c) the value of currency in the market for foreign exchange d) All of the above are correct
When production costs rise,
the short-run aggregate supply curve shifts to the left.
The sticky-price theory implies that
the short-run aggregate-supply curve is upward-sloping. b) an unexpected fall in the price level induces firms to reduce the quantity of goods and services they produce. c) menu costs influence the speed of adjustment of prices. d) All of the above are correct.
An increase in the expected price level shifts the
the short-run but not the long-run aggregate supply curve left.
Other things the same, if the U.S. price level rises, then
the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate rises.
Refer to Figure 33-4. If the economy starts at A and there is a fall in aggregate demand, the economy moves
to C in the long run